Question

Explain various methods for the treatment of goodwill on the admission of a new partner.

Answer 1

At the time of admission of a new partner, Goodwill can be treated in either of the two ways:

First, it can be treated as per Premium Method.

Second, it can be treated as per the Revaluation Method.

(i) Premium Method : This method is applicable only in case when a new partner brings his/her share of goodwill in cash. The following are the different situations under this method.

(a) When the new partner privately pays his/her share of goodwill to the old partners. In case, when the amount of goodwill is directly paid by the new partner to the old partners privately no entry will be passed in the books.

(b) When the new partner brings his/her share of goodwill in cash and the goodwill is retained in the business.

Accounting Entries

For premium or goodwill brought in cash by the new partner:

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Cash Bank A/c}\text{Dr}& & & \\ & \text{To New Partner's Capital A/c}& & & \\ & \text{(Amount of goodwill is brought in cash}& & & \\ & \text{by the new partner)}& & & \end{array}$

For transfering of new partner's goodwill among the old partners, i.e, if goodwill is retained in the business.

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{New Partner's Capital A/c}\text{Dr}& & & \\ & \text{To Sacrificing Partner's Capital A/c}& & & \\ & \text{(Goodwill brought in by the new partner}& & & \\ & \text{distributed among the old partners in their}& & & \\ & \text{sacrificing ratio.)}& & & \end{array}$

If the new partner's share of goodwill is withdrawn by the old partner.

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Sacrificing Partner's Capital A/c}\text{Dr}& & & \\ & \text{To Cash A/c}& & & \\ & \text{(Amount of goodwill withdrawn by the}& & & \\ & \text{old partners)}& & & \end{array}$

(c) If the new partner partly to brings his/her share of goodwill

For bringing goodwill in cash

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Cash A/c}\text{Dr}& & & \\ & \text{To New Partner's Capital A/c}& & & \\ & \text{(Amount of goodwill brought in cash by}& & & \\ & \text{the new partner)}& & & \end{array}$

For transfering of goodwill to the old partners.

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{New partner's Capital A/c}\text{Dr}& & & \\ & \text{To Sacrificing Partner's Capital A/c}& & & \\ & \text{(Goodwill brought in by the new partner}& & & \\ & \text{distributed among the old partners in their}& & & \\ & \text{sacrificing ratio)}& & & \end{array}$

(ii) Revaluation Method : When the new partner is not able to bring goodwill in cash at all. In this case, new, partner's capital account will be debited equal to the amount of his share of goodwill and old partners' capital account will be credited with that portion of new partner's goodwill in their sacrificing ratio. The following Journal entry will be there in this regard.

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{New Partner's CapitalA/c}\text{Dr}& & & \\ & \text{To Old Partner's Capital A/c}& & & \\ & \text{(Share of goodwill of the new partner}& & & \\ & \text{distributed among the old partners in their}& & & \\ & \text{sacrificing ratio)}& & & \end{array}$

Here, it is to be noted that goodwill is recorded in the books only when some consideration in money or money's worth has been paid for it. This practice is mandatory to follow. In case of admission, retirement, death or change in profit sharing ratio among existing partners, goodwill account cannot be raised as no consideration is paid for it.